?The nice thing about gold is that it has no PE multiple. Because it earns and yields nothing, gold is a speculation on the systematic debasement of currencies by central banks,? said Jim Grant of Grant?s Interest Rate Observer.
Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Las Vegas, Nevada on Friday, September 28, 2012. A three-course lunch will be followed by a PowerPoint presentation and an extended question-and-answer period.
I?ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be tossing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $229.
I?ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at a major resort hotel on the Strip that will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
I received another one of those scratchy cell phone calls from my friend in the West Texas oil patch. You could almost feel the dust coming through the ether. He said that while Ben Bernanke his committed to buying $40 billion a month of mortgage-backed securities as part of QE3, he has not promised to buy a single barrel of oil. This is bad for oil.
That means Texas Tea has to take the full brunt of collapsing demand caused by economies in free-fall like Europe, China, and Japan. There are no bailouts here. On top of that, Saudi Arabia wants to whip some discipline into its fellow OPEC members.
Saudi Arabia does this by permitting its own production to surge, dropping prices, and inflicting pain on recalcitrant cartel members, especially Iran. Around $80 a barrel is thought to be a price they would be happy with, some $15 a barrel lower than today?s price.
Last week rumors were rife of a ?fat finger? trade that drew in high frequency traders and triggered an almost instantaneous $4 plunge in the price of oil. But notice how it has failed to bounce back. This generated chart sell alerts more than you can count.
The break of the 50-day moving average on the charts is thought to be particularly significant, reversing an uptrend that has been in place since June. Notice that the ?fat fingers? always seem to hit the ?SELL? button and are oblivious to the location of the ?BUY? button ? maybe they don?t have one.
On top of all this is the never ending threat of a Strategic Petroleum Reserve release by the administration that would cause prices to immediately gap down. It is safe to say that energy is not Obama?s favorite industry. He is essentially sailing ?Buy those $100 calls on oil at your peril, because I will render them worthless.? That is what he did with his jawboning campaign in the spring when crude threatened $107. ?Substantially tougher margin trading requirements for many commodities by the main exchanges quickly followed.
One factor that no one appears to be watching is the dramatic ramp up in Iraqi oil production. In recent years, we have gone from zero to 3 million barrels a day, and appear to be headed toward 5 million barrels a day by 2015. That is half of Saudi Arabia?s total annual output. Norway and Canada are also increasing production.
Back in the U.S., conservation is making a dent on the consumption side in a thousand different ways that are impossible to quantify in the aggregate. Every time someone trades in a gas guzzler for a hybrid or electric vehicle they are cutting U.S. consumption by 24 barrels of oil a year. Toyota will sell 2 million hybrids in the U.S. this year, about half in California. That works out to a total oil savings of 48 million barrels a year, 132,000? barrels a day, or 1.3% of our total imports.
Energy savings are going on every day in a myriad of ways, from better building design, to industrial recycling of heat, and conversion of light bulbs from incandescent to fluorescent. It has become a major cost-cutting issue for U.S. corporations. I just checked the specs on my new 80 inch 3D flat screen TV and it uses a quarter of the power of its cathode ray tube predecessor now headed towards the recycling center (notice how all the actors have suddenly aged 10 years). I have always said that this will be the big sleeper on the American energy front.
The final argument is that in the wake of QE3, there is a sudden death of ?RISK OFF? positions to trade against. Oil is almost one of the only ones out there. So an oil short will partially hedge out downside risk in the substantial ?RISK ON? positions we have built up in (GLD), (AAPL), and (GOOG).
The extra turbocharger on this trade is that the hedge fund community is still hugely long oil, betting an attack on Iran by Israel that never came. As we move into yearend, the pressure on them to dump their losers will be overwhelming. So I am quite happy to buy the United States Oil Fund (USO) December $32.50-$35 put spread at $1.07 or best.
The (USO) in particular is a great instrument to play from the short side because it has one of the worst tracking errors to the underlying in the entire (ETF) universe. (Only the natural gas ETF (UNG) is worse). Notice how it always goes down faster that it goes up. This is because of the enormous contango in the oil futures market, whereby far month futures trade at gigantic premiums to the front months. The (USO) has to take the hit on the rollovers; hence, its terrible track record.
I thanked my friend for his valuable eve insights on oil and then enquired about his view on the election. He didn?t understand all the noise about an Obama win in November. There in the Texas heartland he didn?t know a single person who was voting for the president. I warned him to prepare to be surprised about the November 7 outcome.
The trick is to watch the polls in the ten battleground states, where Obama is ahead by 5-8 points. The national polls have largely become irrelevant. Texas and California have cancelled out each other in the electoral college, so we might as well go out and get drunk on election day.
I asked him to put his money where his mouth was and bet him a case of Sierra Nevada Pale Ale. He answered that I was on, and countered with a case of Lone Star beer. Delivery would be made at Billy Bobs in Houston where the Texas sized 24 ounce chicken fried steaks droop over both sides of the plate. I told him I would collect after my upcoming Houston strategy luncheon on Wednesday, November 7.
Suddenly, Oil is Not Looking So Hot.
?China is the classic emerging market roach motel, except it?s a really big one. It is very difficult to earn adequate returns on capital and to get your capital back as a westerner,? said Jim Chanos of hedge fund Kynikos Associates.
Thank you so much for the newsletter you sent out ? I really enjoyed reading it. You?ve got quite a unique and engaging style as a writer, world traveler/lecturer and of course, trader. I?m glad to see your performance numbers catapulted you to the top percentile of the hedge fund ranks ? all the best on your future endeavors.
Noemi
San Jose, CA
Those transfixed by gold blasting through the $1,750 level have been missing the real action in silver. The white metal has soared 34% to $34 since the beginning of the year, compared to only a 14% move for the barbaric relic, an outperformance of 2.4 to one. I have been a raging bull on the precious metals space since early August. Silver gives you additional diversification into the space with that extra bit of spice on the volatility side.
It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from the flight from the dollar, a certainty since Ben Bernanke proclaimed QE3.? It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy. Most of the silver mined in history has been burned, used in chemical processes, is sitting at the dump, or in people?s teeth in graveyards around the world.
If you don?t think this move is real, check out the shares of the silver producers. Coeur D Alene Mines (CDE) has rocketed by a gob smacking 92% in less than three months, while Silver Wheaton (SLW), and Hecla Mining (HL) have also done almost as well.
Until the shock value of the magnitude of this QE3 are fully digested by the market, the white metal should continue to appreciate. Should the ?RISK ON? move continue, $40 an ounce is on the table by early next year.
Players here should entertain calls or call spreads on the silver ETF (SLV). Those who like to live life dangerously can look at the triple leveraged long silver ETF (AGQ). If you are in the futures market, you trade a 5,000 ounce contract on the COMEX, which offers 8.8 times leverage on an initial maintenance requirement of $18,900.
With silver back in the headlines, I thought I'd touch base with a wizened and grizzled old veteran who still remembers the last time the biggest bubble in history popped for the white metal. That would be Mike Robertson, who runs Robertson Wealth Management, one of the largest and most successful registered investment advisors in the country.
Mike is the last surviving silver broker to the Hunt Brothers, who in 1979-80 were major players in the run up in the 'poor man's gold' from $11 to a staggering $50 an ounce in a very short time. At the peak, their aggregate position was thought to exceed 100 million ounces.
Nelson Bunker Hunt and William Herbert Hunt were the sons of the legendary HL Hunt, one of the original East Texas oil wildcatters, and heirs to one of the largest fortunes of the day. Shortly after president Richard Nixon took the U.S. off the gold standard in 1971, the two brothers became deeply concerned about financial viability of the United States government. To protect their assets, they began accumulating silver through coins, bars, the silver refiner, Asarco, and even antique tea sets ? and when they opened, silver contracts on the futures markets.
The brothers? interest in silver was well known for years, and prices gradually rose. But when inflation soared into double digits, a giant spotlight was thrown upon them, and the race was on. Mike was then a junior broker at the Houston office of Bache & Co., in which the Hunts held a minority stake, and handled a large part of their business.?The turnover in silver contracts exploded. Mike confesses to waking up some mornings, turning on the radio to hear silver limit up, and then not bothering to go to work because he knew there would be no trades.
The price of silver ran up so high that it became a political problem. Several officials at the CFTC were rumored to be getting killed on their silver shorts. Eastman Kodak (EK), whose black and white film made them one of the largest silver consumers in the country, was thought to be borrowing silver from the Treasury to stay in business.
The Carter administration took a dim view of the Hunt Brothers' activities, especially considering their funding of the ultra-conservative John Birch Society. The Feds viewed it as a conspiratorial attempt to undermine the U.S. government. It was time to pay the piper.
The CFTC raised margin rates to 100%. The Hunts were accused of market manipulation and ordered to unwind their position. They were subpoenaed by Congress to testify about their motives. After a decade of litigation, Bunker received a lifetime ban from the commodities markets, a $10 million fine, and was forced into a Chapter 11 bankruptcy.
Mike saw commissions worth $14 million in today's money go unpaid. In the end, he was only left with a Rolex watch, his broker's license, and a silver Mercedes. He still ardently believes today that the Hunts got a raw deal, and that their only crime was to be right about the long term attractiveness of silver as an inflation hedge.
Nelson made one of the great asset allocation calls of all time and was punished severely for it. There never was any intention to manipulate markets. As far as he knew, the Hunts never paid more than the $20 handle for silver, and that all of the buying that took it up to $50 was nothing more than retail froth.
Through the lens of 20/20 hindsight, Mike views the entire experience as a morality tale, a warning of what happens when you step on the toes of the wrong people.
And what does the old silver trader think of prices today? Mike saw the current collapse coming from a mile off. He thinks silver is showing all the signs of a broken market, and doesn't want to touch it until it revisits the $20's. But the white metal's inflation fighting qualities are still as true as ever, and it is only a matter of time before prices once again take another long run to the upside.
Silver is Still a Great Inflation Hedge
?There?s no exit. I think it?s more likely that the Fed buys all the Treasury bonds that exist than to work the opposite direction and start selling them. I have no concept of what the Fed exit strategy is going to look like. It?s way out in the future,? said Jeffrey Gundlach, CEO of fixed income manager Doubleline.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
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